Regulations giving effect to section 1502 of the Dodd-Frank
Act, an act passed by Congress predominantly to increase
transparency of financial institutions, are currently being
finalized by the U.S. Securities and Exchange Commission (SEC).
Despite the general focus of the Act on financial transparency,
section 1502 and the proposed regulations create reporting
requirements for companies that either produce or consume certain
minerals, defined as conflict minerals, mined in the Democratic
Republic of the Congo (DRC), and adjacent countries.

When final rules are adopted by the SEC, Section 1502 will be
one of an increasing number of regulatory frameworks which focus on
tracking and reporting the source of natural resources, and the
processes used to extract and refine them. The approach, which
takes cues from the Kimberly Process developed for diamonds, aims
to encourage the resource extraction sector to develop processes
which allow for an accurate record of the source of natural
resources and the modes of extraction.

The goal of such legislation is to facilitate public support
for, or public pressure against, practices that have potential
human rights, ecological or social impacts. In the case of the
Dodd-Frank Act, the preamble to Section 1502 states the
issue targeted by that section as follows:

It is the sense of the Congress that
the exploitation and trade of conflict minerals originating in the
Democratic Republic of the Congo is helping to finance conflict
characterized by extreme levels of violence in the eastern
Democratic Republic of the Congo, particularly sexual- and
gender-based violence, and contributing to an emergency
humanitarian situation therein...1

Dodd-Frank Section 1502

The Dodd-Frank Act passed the U.S. legislative houses
in 2010 and was signed into law on July 21, 2010. At section 1502,
the law set standards, and mandated the creation of rules, which
allow for the tracing of conflict minerals, and required
substantial reporting on the supply chains of natural resource
extraction industries from companies that utilize the refined
derivatives of those conflict minerals.

The section targeted a series of minerals defined as
"conflict minerals". These included raw minerals from
which tin, coltan, tungsten, gold are extracted, and any additional
derivatives of those raw minerals. It also allowed for the
designation of further minerals as conflict minerals if it is
determined by the Secretary of State that such minerals are
financing conflict in the DRC.

While final regulations have not yet been adopted, as
proposed2 that reporting will be mandatory for reporting
issuers, including publicly traded companies in the U.S., for whom
use of the conflict minerals is necessary to the product or
products the company creates. The SEC has taken the position in its
proposed regulations that this includes mining companies, as they
produce refined minerals as a product3.

If a publicly traded company requires the use of conflict
minerals, that company will be obligated to determine, or attempt
to determine the source of the minerals that it uses. If any of the
conflict minerals a company uses originate in the DRC itself, or in
any adjoining countries (the "DRC Countries"), or it is
unable to determine the source of the minerals, it will be required
to report this publicly. The proposed approach would be for this
information to be included as part of the company's annual
report4 and made available on its website. Additionally,
if minerals originated in one of the DRC Countries, the company
will be required to provide a supply chain due diligence report,
including a private sector audit.

The mandatory nature of the reporting requirements under section
1502 is one of the major departures from the largely voluntary
Kimberly Process developed in relation to diamond extraction.

The Increasing Prevalence of Resource Reporting
Requirements

In addition to section 1502, and the forthcoming regulations, a
separate guidance document relating to conflict minerals has been
approved by the OECD. The recommendations relate to the same
conflict minerals, and seek to "provide" management
recommendations for global responsible supply chains of minerals to
help companies to respect human rights and avoid contributing to
conflict through their mineral or metal purchasing decisions and
practices."5 The OECD has suggested that adherence
to its approach may also meet the informational requirements that
may be set by the Dodd-Frank regulations6.
However, before the regulations are drafted, this is difficult to
assess.

Additionally, in 2010 the European Parliament invited the
European Commission to draft a similar legislative scheme to be
implemented by the European Union7.

Beyond the DRC conflict mineral regulations, and the
pre-existing Kimberly Process, reporting requirements are an
increasingly popular way for national governments to address
international concerns, such as the humanitarian concerns in the
DRC. The implementation of multiple reporting requirements, with
potentially different goals or applications has the potential to
create a complex regulatory system in any resource extraction or
manufacturing sector.

This trend towards transparency in reporting is evident in the
voluntary initiative focused on national reporting of payments made
by oil, gas and mining companies called the Extractive Industries
Transparency Initiative (EITI), which has been implemented by a
number of countries in Africa and internationally8.

Criticism of Dodd-Frank and Resource Transparency

While the goal of resource reporting is laudable, section 1502
does not come without controversy.

Since the time that the Act was passed, a number of companies,
as well as industry organizations, have begun to develop processes
to adhere to the anticipated guidelines. While these initiatives
have had a positive influence in reducing the funds passing to
militant groups in the DRC, they have also reduced investment in
other sectors, including most or all of the mining initiatives in
the eastern Congo, an area where conflict is more
prevalent9 However, it could also be that the delay by
the SEC in instituting these regulations has lengthened the period
of decreased investment as industry waits to see if they can safely
invest and still be compliant. It is hoped that what is happening
now is not indicative of any long term dry up of investment. As a
result, some argue that the overall impact of the measure has been
more negative than positive.

Despite the controversy, the SEC is required to adopt
regulations and it looks as if these draft regulations are set to
go ahead, and look likely to be followed by similar measures
elsewhere.

Navigating the Resource Supply Chain Reporting
Requirements

Section 1502 of Dodd-Frank leaves many questions
unanswered. For example, how much due diligence will be required of
a reporting company that concludes that it requires the use of a
conflict mineral? How critical must a conflict mineral be for it to
be considered "necessary" in a company's
production?

Once these questions have been answered, presumably by the
forthcoming regulations, it will be necessary for affected
companies to develop processes to fulfill the requirements set by
section 1502. This will include the need to identify and address
the obvious practical difficulties that arise with tracing and
reporting.

As new standards arise, those standards will have to be tested
against existing reporting requirements to assess whether they have
already been met, or whether they require additional due diligence
and reporting. Will the OECD guidance actually satisfy the
Dodd-Frank requirements? If so, will the proposed European
initiative impose more or less restrictive standards?

Each of these questions require attention, and will involve a
careful approach to developing reporting processes that meet the
standards set without sacrificing competitiveness in the
market.

7. European Parliament resolution of 7 October 2010 on
failures in protection of human rights and justice in the
Democratic Republic of the Congo, available online on the European
Parliament website,here(last accessed on April
2, 2012).

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